Little support for construction industry

UK: There was little comfort for the beleaguered construction products industry in today's Budget statement, despite the chancellor's stated desire to invest and grow our way out of recession.

Commenting on the Budget, Michael Ankers, chief executive of the Construction Products Association, said: "While welcoming the additional measures to stimulate the private housing market and improve the condition of the public sector housing stock, there is little else in the Budget to comfort a construction industry that is facing a decline in output this year in excess of 12% - the largest fall the industry has experienced in a single year since WWII. The additional £300m for the building colleges programme will support only about 10% of the projects that the Learning and Skills Council have indicated are up and ready to go.

“More disappointing is the failure to include any measures that will encourage improvement to the existing private sector housing stock.

"The Government has ignored the united voice of the construction industry to reduce VAT to 5% on domestic repair and maintenance. This really is a missed opportunity, particularly given the very strong encouragement last month to Member States from the European Council to take this step.

"This failure to act is even more surprising given the announcement in parallel to the Budget that the Government will be seeking to reduce carbon emissions by 34% by 2020 - a target that critically depends on making our existing housing stock more energy efficient."

Mr Ankers went on to state that "Product manufacturers and suppliers do welcome the announcement of a top up scheme to support credit insurance. However, we have been pressing for this since before Christmas and it will only help companies who have found credit withdrawn since 1 April. The real damage was done before then and for those many companies that have had credit insurance reduced in the early part of the year, it is of no value at all.

"Despite widespread calls from across the whole of manufacturing, the chancellor has failed to do anything further to reduce the burden of empty property rates on manufacturing companies that have been forced to mothball operations because of the recession. This will do nothing to help these companies through these difficult times and ensure that UK product manufacturers are in a strong position to take advantage of the upturn which the Government is so confident is just around the corner."

Looking to the future, the chancellor confirmed the dramatic scale of public borrowing that will take years to bring back into balance. Beyond the current year and the next election, net investment is set to fall to 1.25% of GDP and this, said Mr Ankers, will have significant implications for the construction industry, particularly if private sector investment has not recovered sufficiently to take up the inevitable slack.

"The Government has acknowledged that the construction industry is key to leading the economy out of recession. Unfortunately, this government aspiration has not been reflected in the proposals set out in the Budget."

General Budget overview

There was little comfort in this year’s Budget statement for the industry. Some further measures to assist in the private and social housing markets were welcome but were relatively modest given the scale of the downturn in the housing sector. The Learning and Skills Council may have irresponsibly committed to projects in its colleges' programme for which it did not have the funds but as a result there were at least projects that could be got off the ground very quickly. An additional £300m of funding will only support about 10% of these additional schemes and seems to be a missed opportunity.

While the provision to support credit insurance is welcome, for many it is too little too late and for those whose insurance has been withdrawn or reduced before 1 April it has no value at all.

Perhaps the biggest disappointment is that the Government has once again failed to act on VAT on domestic repair and maintenance, including lower rates on a wider range of energy efficient products.

Also disappointing is the failure to act on empty property rates - an unnecessary burden on companies already struggling to maintain properties in anticipation of an upturn.

On the broader perspective, the chancellor's view of GDP growth of 1.25% in 2010 is far more optimistic than independent commentators, including the CPA's own assessment.

At the same time, the Chancellor confirmed the scale of the public sector debt that is being built up. By 2013-14 net public borrowing will still be £97bn, whereas less than two years ago a figure of £50bn would have raised major alarm in the City.

This, coupled with the reduction of net government investment to 1.25% of GDP by 2013-14, augurs badly for government capital spending after 2011 with significant implications for public sector spending on construction.

The government has acknowledged that the construction industry is key to leading the economy out of recession. Unfortunately, this Government aspiration has not been reflected in the proposals set out in the April 2009 Budget.

Economic and fiscal overview

The Treasury has significantly downgraded GDP growth forecasts once again, with the economy now expected to contract at a rate of between -3.75% and -3.25% in 2009, in line with other independent macro-economic forecasts.

The Chancellor expects to see growth in GDP towards the end of the year and anticipates that the economy will grow by between 1% and 1.5% in 2010, followed by growth of between 3.25% and 3.75% in 2011 before the economy recovers towards a trend rate of growth of around 2.75%. This is considerably more optimistic than the majority of other forecasters.

UK manufacturing output contracted during 2008, falling by 2.5%. Manufacturers have been severely affected by the deteriorating economy, loss of confidence and fall in world trade and output fell 5% in the final quarter of 2008, followed by a further fall of 3.75% in the first two months of 2009. The sector is expected to experience sharp falls in 2009 before recovering in 2010 in line with recovery in the economy as a whole.

The Government reaffirmed its target for CPI inflation at 2%. CPI inflation is currently 2.9% but expected to reach 1% by the end of 2009.

CPI inflation prospects in the pre-Budget report in November 2008 were for inflation to reach the target of 2% by 2010. However, the chancellor has predicted that inflation will remain at 1% during 2010 and anticipates inflation reaching 2.25% by the end of 2011, exceeding the 2% target.

Net public borrowing in 2008-09 was revised upward to £90bn, £12.4bn more than forecast in November.

The Chancellor is expecting the current deficit to halve within the next four years from an expected £-132bn in 2009-10 to £-74bnin 2013-14.

Net borrowing is predicted to peak in 2009-10 at £175bn (12.4% of GDP), £57bn above the pre-Budget report forecast in November 2008. By 2013-14, net borrowing is expected to fall to 5.5% of GDP (£97bn).

Current spending is expected to grow by an average 0.7% a year between 2011-12 and 2013-14 in real terms and public sector net investment is anticipated to fall from 3.1% of GDP in 2009-10 to 1.25% of GDP by 2013-14.

Investment in built environment

A £600m package has been announced to help housing with the addition of up to 10 000 new homes.

Of this, £400m has been allocated to assist stalled housing developments and development finance through reducing up-front costs, £100m has been assigned to local authorities for energy-efficient housing and £80m has been made available for the HomeBuy Direct mortgage equity scheme.

In addition, £50mhas been allocated for the provision of armed forces accommodation.

There will be an additional £300m of capital funding for investment in further education colleges up to 2011.

The Stamp Duty exemption on homes below £175 000 announced in the pre-Budget in November 2008 has been extended and will now finish 31 December 2009.

Creating a supportive business environment

Up to £5bn of public finance, matched by industry, has been made available to assist companies who have had cuts in credit provision between 1 April 2009 and 31 December 2009, for a period of six months.

The reduction in VAT from 17.5% to 15% is extended until 1 January 2010.

Fuel duty will increase in September 2009 by 2p/litre and by 1p//litre (in real terms) in the years afterwards.

Businesses will be able to spread the payment of the 2009-10 inflation up-rating of business rates over three years. This will include measures to allow those affected by the end of the 2005 transitional relief scheme to also spread the increase in their bills over three years.

Enhanced loss relief, whereby companies can carry back trading losses up to £50 000 for up to three years, has been extended for a year and now operates for 2009-10.

Capital allowances for new investment will increase to 40% for one year, with effect from April 2009 to allow a higher proportion of private investment to be offset in that year against taxable profits.

In addition, the Government will increase from 1 May 2009 the VAT registration threshold in line with inflation from £67 000 to £68 000.

The climate change levy will be frozen for 2010-11.

The aggregates levy will be frozen at £2/tonne in 2010-11

The standard rate of landfill tax will continue to increase by £8/tonne each year from 1 April 2010 to 1 April 2013. The lower rate of landfill tax will remain frozen at £2.50/tonne for 2010-11.

Following January 2009's announcement that it would be setting up a scheme to enable banks to lend more easily, a package of government guarantees on new mortgage-backed assets has been established, initially until October 2009.

Improving industry performance

A £750m strategic investment fund will be created to support advanced industrial projects of strategic importance. Some £250mof this fund will be earmarked for low-carbon investments, a further £50m for the Technology Strategy Board (TSB) to support business investment and £10mfor UK Trade and Investment (UKTI) to promote exports.

Sustainable construction

A series of measures to combat climate change, including a target of a 34% reduction in carbon emissions by 2020. Some £375m has been assigned to support energy and resource efficiency in businesses, public buildings and households over the next two years.

Some £70m has been allocated for decentralised small-scale and community low-carbon energy.

A further£525m will be made available for investment support over the 2011 to 2014 period for offshore wind projects reaching financial close prior over the next two years.

A sum of£405m will be provided to support low-carbon industries and advanced green manufacturing.

A funding mechanism will be established to enable four carbon capture and storage demonstration projects are set to go ahead with £90m to fund detailed preparatory studies.

A wage increase for apprenticeships, frozen fuel duties and help for first-time buyers were among the key spending plans outlined by the Chancellor of the Exchequer, George Osborne, in yesterday's Budget.